Bernanke doesn't expect U.S. double-dip recession

WASHINGTON (MarketWatch) -- Federal Reserve board chairman Ben Bernanke said Tuesday he didn't think that the U.S. economy would slip back in to recession, saying that consumer spending and business investment seem strong enough to keep the economy growing, albeit at a relatively subdued rate.

"My best guess is we'll have a continued recovery [but] it won't feel terrific," he said.

Fears of a double-dip recession have multiplied in recent weeks. The weak May employment report released Friday, which showed just 41,000 private-sector jobs were created last month, was only the latest signal that the U.S. economy may be softening again.

Bernanke was interviewed by ABC News reporter Sam Donaldson at a dinner sponsored by the Woodrow Wilson International Center for Scholars.

Coming into 2010, the big question was whether the economy would "get its own legs" and not have to rely on government fiscal medicine and inventory behavior, Bernanke said.

"So far the news is pretty good," Bernanke said.

"We've seen consumer coming back. We've seen firms spending more. There are some signs the private sector is picking up the baton and moving the economy forward," he said.

Bernanke quickly noted that there were "caveats" to this forecast. Growth was still not fast enough to bring down the high unemployment rate.

In addition, the U.S. banking sector was "not completely healthy," he said. Banks were still deleveraging and not making as many loans as "we'd like to see," Bernanke said.

Watching Europe

Asked about the European debt crisis, Bernanke repeated that the Fed was watching the situation closely but gave no insight into how weaker European growth might impact the U.S. economy.

Bernanke said the European banking and debt woes were reminders that the U.S. had to get its fiscal house in order with a "medium-term exit strategy." He said it would not be possible for the U.S. to take swift measures to cut the deficit but said a plan needed to be crafted that would lower the debt over time.

Asked if he saw any such plan taking shape, Bernanke replied "no."

Proposed reform of Wall Street

The Fed chairman expressed general contentment with the financial reform legislation moving though Congress, calling it a "pretty sensible approach."

Congressional leaders are picking select groups of members to participate in efforts to reconcile the financial-industry regulation bills approved by the House and Senate.

The group is hoping to formally begin working out differences between the two bills during the week of June 14 and finish before July 4th.

Noting that there were a "lot of pieces" to the measures, Bernanke said there were some things he would change, but went on to say that the legislation contain measures aimed at controlling the "too-big-to fail" issue.

This is the "acid test" for any reform, he said.

The House and Senate bills both create a system to dismantle a failing Lehman-like mega-bank so that its collapse doesn't unsettle the markets. Even though each chamber covers the costs of such a mechanism differently, both have the same principle: empowering bank regulators to allocate funds to the counterparties of the collapsing institution so that they don't fail as well.

Bernanke said he supported a measure in the Senate bill that would instruct bank regulators to study limiting the speculative activity of big banks and would follow the recommendations made by the agencies' report.

"I think that can be made to work," Bernanke said.

The proposed limit is dubbed the "Volcker Rule" after former Fed Chairman Paul Volcker, who chairs President Barack Obama's economic advisory panel. It would seek to prohibit big banks from making speculative investments in stocks, bonds and derivatives, limit their growth, and force big banks to divest hedge fund and private equity units.

Bernanke will have a chance to expound on his views on Wednesday when he testifies before the House Budget Committee on the outlook for the economy and the budget.

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